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Assume that you are an investor and are in the market forcorporate debt. You run across XYZ Corporation'sbonds which have a 20 year term a 7.5% coupon (interest paidsemi-annually) and were issued five years ago ( Sep 1st.2005) at par. Over the last five years, interest rates havefluctuated substantially and the following table shows the requiredreturns for XYZ bonds for the last 5 years. In allcases assume that the coupons are not reinvested.
Date
Required Return
Sep 1st.,2006
8.50%
Sep 1st.,2007
6.75%
Sep 1st.,2008
5.95%
Sep 1st.,2009
6.35%
Sep 1st.,2010
7.00%
(a) Calculate the annual rate of return for each of the last five years (Sep 1st of each year) since the bonds wereissued.
(b) If the required return on thisbond a year from now, September 1st., 2011, is expectedto remain the same at 7.00%, what will be the expected rate ofreturn for the coming year?
(c) Repeat part (b) assuming theexpected required return at September 1st., 2011 is6.00%.
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